Clean Harbors Shares Could Be Polluted By Excessive Optimism

While the broader S&P 500 Index has tacked on about 13.9% in 2012, the shares of Clean Harbors Inc (NYSE:CLH) have shed more than a quarter of their value. In fact, the environmental services provider has underperformed the index by about 24 percentage points during the past three months. Nevertheless, Wall Street remains bullishly biased toward the security — pointing to a potential opportunity for contrarian bears.

Ushering the stock into the red have been its formerly supportive 10-week and 20-week moving averages, which haven’t been conquered on a weekly closing basis since late April. More recently, CLH gapped lower in mid-September, crossing the mid-century mark for the first time in close to a year. The site of this downward move could evolve into resistance going forward.

Triggering the bearish gap was a negative analyst note, after Baird downgraded CLH to “neutral” from “outperform,” and slashed its price target to $58 from $68. Furthermore, the analysts noted “near-term fundamental concerns,” and said “flagging rig counts, unfavorable Canadian weather and ongoing equipment transition” could translate into third-quarter risks.

However, there could be more downgrades on the horizon for CLH. Despite its challenges on the charts, the security still harbors five “strong buys” and two “buy” endorsements from analysts, compared to three lukewarm “holds” and not one “sell” or worse suggestion. What’s more, the consensus 12-month price target on the equity stands at a lofty $67.09 — implying expected upside of 41% to CLH’s closing price of $47.61 on Thursday, and in territory not charted in five months.

Elsewhere, that optimism is also prevalent in the options pits. The stock’s Schaeffer’s put/call open interest ratio (SOIR) stands at 0.25, indicating that calls quadruple their put counterparts among options with a shelf life of three months or less. Plus, this ratio rests just six percentage points from a 12-month low, implying that near-term options traders have rarely been more call-heavy during the past year.

Should CLH extend its journey lower, the sentiment on the Street leaves the stock vulnerable to a bullish backlash. Another wave of downgrades and/or price-target cuts, or an unwinding of optimism in the options arena, could exacerbate the security’s technical struggles.

Investors expecting more downside for CLH should consider buying the stock’s in-the-money April 55-strike put, which was last offered for $9.50.

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